The 2018-19 budget builds on the last with increased commitments to infrastructure and lower taxes for businesses and individuals. While there is a little bit for everyone, there is little doubt that it is an election budget designed to appeal to the mainstream voter, and clearly demonstrated by the Coalition’s cornerstone proposal to provide immediate tax relief for middle-low income earners and offering very few expenditure cuts.
We summarise the key proposals for investors:
Economy doing the heavy lifting
Strong employment growth and higher tax receipts have reversed the fortunes compared to the underwhelming budget position a year ago. The budget is expected to return to surplus a year earlier than expected. Higher than expected commodity prices and tax receipts coupled with some fiscal restraint will see the budget return to a $2.2 billion surplus in 2019-20. In our view, this will allay some of the concerns raised by rating agencies over the past two budgets and reaffirm Australia’s AAA rating.
Few unpleasant surprises for the equity market
Unlike the past few Coalition budgets where the focus has been on budget repair and fiscal restraint, few announcements have the potential to shake the confidence in the equity market this time around. The biggest positive for the market is the additional commitment to infrastructure where the budget again surprised on the upside. On the whole, some income tax relief and increases in infrastructure spending should reinforce the confidence that there is finally some fiscal response to a period of below-trend economic growth.
Older Australians set to reap the rewards
A number of positive announcements were made to benefit baby boomers including: increased funding for home-care support, incentives for older Australians to stay in employment and start new businesses, and the pension loan scheme has been expanded to allow retirees to borrow against the value of their home up to the value of their age pension.
Some help for the cautious consumer
We see a small net benefit for the consumer through the scrapping of the Medicare levy uplift and lowering the effective tax rate for low income earners. Negligible real wages growth and a high level of household debt will mean that the tax relief will likely be absorbed in housing-related expenditure.
Infrastructure top-up
An additional $24.5b infrastructure package to fund road and rail projects including $14b along the east coast. Notable projects include a new $5.1b Melbourne Airport rail link, $1b Brisbane to Gold Coast M1 upgrade, $800m in new Bruce Highway upgrades, WA road and rail commitments totalling $3b, and $1.5b in road and rail upgrades for SA. The ramp up in infrastructure spending should support tendering opportunities for suppliers, engineers and contractors (Wagners, Boral, Cimic, Downer, Adelaide Brighton, Acrow).
Personal income tax seven-year plan
A total of $13.4b in personal income tax cuts were announced. The changes take place over seven years in three phases through a combination of bracket simplification and rate adjustments:
Conclusion
Ongoing tax reform and increased fiscal spending in infrastructure is healthy in our opinion, particularly as the Australian economy transitions in a period post peaks in mining investment and housing. Seeking to re-balance equity in the tax system and stimulating growth as the nation’s circumstances change shouldn’t disagree with the aim of creating a more efficient and market friendly economy. Given the long lead-time before implementation of personal (seven years) and business (10 years) tax reforms, we’ll have to wait and see whether the plans become reality.
While we are pleased that government spending has been reined in to some extent, there’s not enough in the budget, in our view, to bring about significant upside revisions to corporate earnings . With Australian shares already looking extended, local investors have reason to be cautious in the coming months.
- Boh Burima, Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
